How Much Are You Willing to Pay for Electricity?

Generators are built to supply the load of consumers. However, for generators to come to the electricity grid there are high costs to build them. When they are finally built, which may take years, the amount of energy they provide can be paid for at the price of energy in the market. And, every year the load growth of areas continue to increase, and at one point more generation must come to the grid.

In Texas, the structure to pay is based on a wholesale deregulated market. When there is an abundance of energy the price of electricity is relatively affordable. From the years of 2008 to 2011 the average price was $51 per MW per the State of the Market Report for ERCOT done by Potomac Economics. [1] In times where there is scarcity, as in not enough generators to supply the demand, the price may or may not have been high to indicate there were impending problems in the grid. One of the current projects before the PUCT is called the Ensure Resource Adequacy in Texas. [2] And in one of the documents filed before the PUCT there is a discussion on pricing scarcity more clearly during real-time. [3]

The proposal discusses a curve to price reserves in scarcity situations that may or may not help better signal to the ERCOT market that new generation needs to be built. The curve at the highest point is set at what is called the value of lost load, also known as VOLL. Steven Stoft states this is “The value of another megawatt of power equals the cost imposed by involuntary load curtailment.” [4] The VOLL value has not been defined, but a referenced value by some is $10,000 per MW, much more than the average real-time price mentioned earlier.

The key issue I would like to explore is, as a customer of energy, what are we absolutely willing to pay before we would not want to pay any more for electricity? As in, the value of lost load for each person or even business that is willing to pay could be at a wide range of values. With this information the market could better decide that in a scarcity situation, what certain customers would like to be “curtailed” before others. In other words, lets say in a rolling blackout, the people that were cut off from electricity was not based on region, but the people willing to not pay more for a certain price of electricity. This adds a lot more flexibility in the level of generation and demand that may be required for the year, and not a fixed target for generation.

So, what is the value of lost load to you? When do you think you’d like to stop paying for energy? When is it too high?

[1] ERCOT 2011 SOM Report

[2]Ensure Resource Adequacy in Texas

[3]Back Cast of Interim Solution B+ to Improve Real-Time Scarcity Pricing

[4] Stoft, Steven. “Power System Economics.” Piscataway: IEEE Press, 2002. Print.



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2 responses to “How Much Are You Willing to Pay for Electricity?

  1. Interesting blog. Basically saying that in a rolling blackout ERCOT chooses who doesn’t get electricity based on the price they’re willing to pay? Currently I believe ERCOT is just as likely to turn off power for an industrial market as a rural community which doesn’t make sense. A more capitalistic view would be to keep certain grids on based on the willingness to pay more money for the power. That being said, I think Texas politics is too populist on both sides of the aisle to enact a measure like this that puts ERCOT in charge picking and choosing who gets electricity.

    Interesting idea.

    William McCraney University of Texas at Austin Mechanical Engineering

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  2. This is an interesting question to ask. To me, it makes sense to set the pricing to increase as demand goes up and the energy generation nears a breaking point. As the price goes up, more people would opt to conserve energy to try and save money. This is where smart meters would come in handy. If the price fluctuates, you would be able to figure out when your energy use gets beyond some amount you are willing to pay (all in real time). The problem as it stands now is that most people don’t know how much energy they use until the bills comes the next month. People are, of course, always going to want cheap energy all the time, but this policy would definitely help lower peak demands and help prevent rolling blackouts.

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